What Is Your Agent’s Cut?

What Is Your Agent’s Cut?

The answer can be the difference between a good policy and a rip-off.

If you want to rein in your insurance costs, start by finding out how much of your premium goes directly into your insurance agent’s pocket. It is not unusual for the commission to be as much as 100 percent of the first year’s premium on a universal or whole life cash-value.

Consider, for example, a typical $350,000 whole life policy on a 38-year-old male, paying a $4,600 premium annually. If he paid full commission to purchase the policy, the cash surrender value – the amount available in cash – after a year would be zero. That means if he, for whatever reason, decided to abandon the policy after a year, he would not get any of his money back.

However, if he bought the same policy without paying any commission, the policy would have a cash surrender value of $3,800. By the fifth year, the policy bought on full commission could be cashed in for $14,700. The policy bought without any commission would pay $20,500.

After ten years, if the projections on both policies pan out, things become a little confusing: the policy on which full commission was paid would pay $46,700, but the policy bought without paying commission would pay just $44,500. That’s because the projections assume that the cash invested in the policies will earn interest at a certain rate, and full commission products often offer higher interest rates that may eventually compensate for their higher costs. But that is only after about 10 years, and those projections cannot be guaranteed. The National Association of insurance Commissioners is considering banning long-term projections because they can be misleading.

Agent's Cut. Photo by Elena

The lower the agent’s commission you can negotiate, the greater the savings that will be building up value in your insurance policy. The National Insurance Consumer Organization recommends the consumers buy only cash-value policies with first-year surrender values of no less than 50 percent of the annual premium. In other words, you should be able to get out of a policy after a year and still be able to recoup at least half of what you put into it.

Although your agent is not required by law to tell you how much he’ll earn on your business, he might at least be persuaded to tell you about other insurance packages the company has to offer – the same policy, but with lower commission rates. You can also cut out the agent altogether and buy no-commission – often called low-load – cash-value insurance directly from Ameritas or USAA Life, or through a fee-based financial planner.

Another alternative term insurance. The policy itself does not build up any cash-value, and it pays a benefit only when you die, but agents’ commissions on term insurance are usually lower than on other insurance products.